Little known fact about stocks

Have you ever seen those brief business reports on your local news that sum up the days’ stock activity? Many times when they focus on a particular stock they talk about how the company released its earnings and they were better than expected. Good news right? Then they go on and say the stock was down 2% on the day.  Wait…..WHAT??? That doesn’t make any sense. Why would the stock be down for the day if the company just reported better than expected earnings results? Something is wrong here. Let me explain the likely cause for this discrepancy.

When results are better or worse than analysts or “the street’s” forecasts what that means is that the company reported higher numbers than the consensus of the most notable analysts estimated. These analysts track companies and generate estimates as to how well they think they are performing. Investors look to these analysts often times as a substitute for doing their own tracking because it can be very time consuming so they leave it to those whose job it is to do nothing but track and analyze companies. However, this does not explain why a company’s stock does not always correlate to the analysts predictions.

The main reason for this is because the analysts are not the only ones making predictions. There is something called a Whisper Number that is sometimes more influential in the rises and falls of stock prices when earnings are reported. A whisper number is an average from individual investors’ expectations of a company’s earnings and they use the analysts’ forecasts as part of their calculations but they add the expectations of actual investors and past performance, among other metrics. It is usually reserved for the wealthy and connected few and thus, these numbers can carry more weight. 

However, since these figures are not flaunted in the public and are reserved to the preferred clients, we do not usually hear about them. Also, the whisper number is often higher than the analysts’ forecasts. I will take a pretend company and scenario to illustrate what I mean:

ABC123 Company is about to release its 3rd quarter earnings results and analysts expect $1.15 per share. 

ABC123 Company beats those forecasts and reports $1.22 earnings per share (EPS), but still the stock closes down on the day.

The reason was because the Whisper Number was $1.27 EPS and thus, even though the company beat analysts’ forecasts it faired worse than the whisper number and the elite few (who actually are major traders due to their vast resources and stock holdings) sold off shares which dropped the price.

I hope this explanation helped you understand a little bit about how the market forces work and why sometimes a company’s shares rise or fall when common sense would tell you the opposite. To learn more about whisper numbers check out: www.whispernumber.com